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Thursday, August 18, 2022

Inflation, Tough Operating Environment tip Insurers into Underwriting Loss

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The largest listed insurers have recorded negative real underwriting results as surging inflation which policy makers are unable to control prevents sector players from reaping the benefits of an improvement in revenue.

Quieter roads during the pandemic that forced the government to impose a lock down measure to curb the spread of the virus continued to boost car insurers.

However, the inflation rate has been rising since the first quarter of 2021 due to the relaxation of the lockdown policy that paved the way for motorists to hit the road, which has driven car claims cost higher.

Additionally, the war between Russia and Ukraine that is responsible for hawkish stance by central banks across the globe and Nigeria stoked inflation while rising diesel costs and high cost of doing business means operating expenses are skyrocketing.

The aforementioned squeeze forced quoted insurers into a loss making combined ratio of 127.12 percent in March 2022 from 106.80 percent as at March 2021, according to MoneyCentral calculations.

Of course, they incurred negative real underwriting results of N1.96 billion as at March 2022 from a loss position of N2.68 billion the previous year.

The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.

Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income.

Nigeria’s annual inflation rate accelerated for the fourth month to 17.71 percent in May of 2022 from 16.82 percent in the previous month and above market expectations of 17.4 percent.

That made the central bank hike the monetary policy rate to 13.0 percent from 11.50 percent and there are indications of more rate hikes before the end of the year.

Insurance chiefs say inflation threat which could lead to an upward review of pricing as consumers are expected to bear the brunt economic uncertainties.

These firms collectively incurred N37.21 billion in claims expenses while the combined operating expenses (management and acquisition cost) hit N38.92 billion, according to data gathered by MoneyCentral.

The youth protest against police brutality called the “ENDSARS protest” which resulted in destruction of properties across the country  resulted in huge claims.

The Nigerian Insurers Association (NIA) confirmed that over N11.0 billion has been paid by insurance companies for the settlement of claims associated with  losses from the protest.

As of November 2021, 718 claims have been settled on vandalization, 93 on looting, 113 on theft, and 136 claims on loss of cash. This is evident in the sharp uptick of 37.8% y/y to N172.9 billion in total claims paid in 2021, according to the latest report by Afrinvest Securities.

“We laud this development as it is instrumental to strengthening trust in insurance companies which in turn would improve the adoption and penetration of insurance products,” said analysts at Afrinvest Securities.

Rising underwriting expenses and mounting obligations are responsible for deteriorating profit that has been heightening investor apathy towards the insurers’ shares.

There has been poor pricing of insurance companies in Nigeria with a price-to-book ratio of 0.64x compared with Brazil (2.58x), South Africa (2.48x), Egypt (1.66x), and Kenya (0.65x), according to data compiled by Afrinvest Securities.

While the Oil and Gas, Consumer Goods, and Industrial Goods sectors were part of the growth momentum in equities from January to June, the financial sectors were laggards.

The Insurance Index lost 10 percent in the half-year of 2022, underperforming the NGX ASI 21.30 percent.

While a hike in interest rate is expected to bolster investment income, there is downside risk to earnings.

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